SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                     For the Fiscal Year Ended June 30, 1997

                        Commission File Number 001-10647

                       PRECISION OPTICS CORPORATION, INC.
                 (Name of small business issuer in its charter)

              MASSACHUSETTS                                 04-279-5294
      (State or other jurisdiction                        (I.R.S. Employer
    of incorporation or organization)                     Identification No.)

                                22 EAST BROADWAY
                          GARDNER, MASSACHUSETTS 01440
               (Address of principal executive offices) (Zip Code)

                   Issuer's telephone number is (508) 630-1800

           Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of each exchange on
      Title of each class                               which registered

COMMON STOCK, $.01 PAR VALUE                       BOSTON STOCK EXCHANGE, INC.

Securities registered pursuant to Section 12(g) of the Act: None

         Check whether the issuer (1) filed all reports  required to be filed by
Section  13 or 15 of the  Exchange  Act  during  the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for the past 90 days. Yes X No

         Check if no disclosure of delinquent filers to Item 405 of Regulation
S-B is contained in this form, and no disclosure will be contained, to the best
of registrant's knowledge, in definitive proxy or information statements in-
corporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB.   X

         The issuer's revenues for its most recent fiscal year were $7,372,310.

         The aggregate  market value of the voting stock,  consisting  solely of
common stock,  held by non-affiliates of the issuer computed by reference to the
closing price of such stock was $14,564,090 as of June 30, 1997.

         The number of shares of  outstanding  common  stock of the issuer as of
August 31, 1997 was 6,046,502.


                       DOCUMENTS INCORPORATED BY REFERENCE

         The  issuer's   Proxy   Statement  for  the  1997  Annual   Meeting  of
Shareholders  to be held on November 11, 1997 is  incorporated  into Part III of
this Form 10-KSB.


                                                           





                                     PART I

ITEM 1.   BUSINESS

Business Development.

         Precision Optics Corporation, Inc. (the "Company") designs, develops,
manufactures, and sells specialized optical systems and components and optical
thin film coatings.

         The Company completed a private placement of 1,000,000 shares of Common
Stock in August 1990, an initial public  offering of 1,200,000  shares of Common
Stock in November  1990,  and a public  offering of  1,176,250  shares of Common
Stock in February 1992. In conjunction with these offerings,  the Company issued
warrants for a total of 320,000  shares of Common Stock to the selling agent and
underwriters  for  the  offerings.  Before  these  offerings,  the  Company  was
privately  held.   Precision  Optics  Corporation,   Inc.  was  incorporated  in
Massachusetts in 1982.

         In August 1992, the Company  established a  wholly-owned  subsidiary in
Hong Kong to market and sell the Company's  products  throughout the Pacific Rim
marketplace  and to engage  in  general  activities  relating  to the  Company's
business.   Also  in  August  1992,  the  Company   established  a  wholly-owned
subsidiary,  Precise  Medical,  Inc.  ("Precise  Medical"),  to market  and sell
medical  video  endoscopy  systems  that  incorporated  the  Company's  products
directly to end users  (hospitals,  physicians,  etc.).  On July 14,  1993,  the
Company closed Precise Medical because of its inability to achieve acceptance in
the medical video systems marketplace.

         References to the Company contained herein include its two wholly-owned
subsidiaries except where the context otherwise requires.

Business of Issuer.

         The Company  designs,  develops,  manufactures,  and sells  specialized
optical  systems and  components  and optical  thin film  coatings.  The Company
conducts  business in one industry  segment  only.  The  Company's  products and
services fall into the following  areas:  medical  products for use by hospitals
and physicians, industrial optical products and thin films, and advanced optical
system design and  development  services and products,  primarily under contract
either  directly  or  indirectly  with  the  United  States   Government   ("the
Government").

         PRINCIPAL PRODUCTS AND SERVICES AND METHODS OF DISTRIBUTION

         Medical Products.  The Company's medical products include endoscopes
and image couplers, beamsplitters, and adapters, which are used as accessories
to endoscopes.

         In January  1991,  the  Company  began the design  and  development  of
endoscopes using various optical  technologies for use in a variety of minimally
invasive surgical and diagnostic procedures throughout the human body. In fiscal
year 1997, the Company  completed  development and began selling its new line of
arthroscopes,  which  are  specialized  endoscopes  used in joint  surgery.  The
Company's  endoscope sales have been primarily to manufacturers of video cameras
and medical  products and video endoscopy  systems.  In addition to its existing
line of endoscopes, the Company is


                                       -2-

<PAGE>



continuing to develop  different  types of endoscopes that  incorporate  varying
types of  construction  and  technology  for  varying  medical  specialties  and
functionality.

         The  Company  developed  and has  manufactured  and sold  since  1985 a
proprietary   product  line  of   state-of-the-art   instrumentation  to  couple
endoscopes to video cameras.  Included in this product line are image  couplers,
which  physically  connect the endoscope to the video camera system and transmit
the image viewed through the scope to the video camera.  Another  product -- the
beamsplitter  --performs  the same function  while  preserving for the viewer an
eyeport for direct,  simultaneous viewing through the endoscope. The Company has
sold these  devices  primarily to endoscope and video camera  manufacturers  and
suppliers for resale under its customers' names.

         The  Company's   image   couplers  and   beamsplitters   can  withstand
surgery-approved  sterilization.  The  Company  also offers  autoclavable  image
couplers,  which are able to withstand  sterilization in superheated steam under
pressure.  Autoclavability is a preferred method of sterilization because of its
relative speed,  safety,  and efficiency.  The Company believes there is a trend
toward increased  sterilization  of medical  instruments and that it is the only
company in the world that produces autoclavable image couplers.  The Company has
investigated   the  development  of  an  autoclavable   beamsplitter.   Although
autoclavable  endoscopes and video cameras,  the necessary components to a fully
autoclavable video-monitored endoscopy, are not yet available, the Company is in
the process of  developing  an  autoclavable  endoscope  and believes that video
camera manufacturers are attempting to develop autoclavable video cameras.

         There can be no assurance as to the general market acceptance of any of
the Company's new products.

         Included in the  Company's  medical  products  sales are sales of image
couplers  and  beamsplitters  for  video-monitored  examination  of a variety of
industrial cavities and interiors. The Company has developed, and may develop in
the future, specialized borescopes for industrial applications.

         Advanced Optical Design and Development Services.  The Company provides
on a contract basis advanced lens design, image analysis, optical system design,
structural  design and analysis,  prototype  production and  evaluation,  optics
testing,  and  optical  system  assembly.  Some  of  the  Company's  development
contracts have led to optical system  production  business for the Company,  and
the Company believes its prototype  development  service may lead to new product
production from time to time.

         Within the advanced optical design and development  area, the Company's
recent  sales have  largely been of  night-vision  products  and services  which
permit users to see in extreme low light.

         Under  contract  with a  customer  that  produces  and  sells  aviation
night-vision  goggles to the United  States  Army,  the Company has designed and
produced the eyepieces for aviators'  night-vision goggles.  Under contract with
the same customer,  the Company designed and currently  produces  collimator and
objective assemblies for night-vision goggles used by ground personnel.

         Under  additional  design  and  development  contracts  with  the  same
customer,  the Company has designed an objective lens for aviators' night-vision
goggles, designed and built prototypes of an objective lens for ground personnel
goggles, designed and built new lens system prototypes for night


                                       -3-

<PAGE>



driver's  viewers  and  armament  sites,  and  designed  and  built a  magnifier
attachment for ground personnel goggles. In addition, the Company has designed a
new objective lens and eyepiece for aviators' night-vision goggles.

         The  Company  has  in the  past  and  expects  in the  future  to  have
difficulty competing for production  contracts for night-vision  products due to
the lower  prices  offered by foreign  manufacturers.  In  addition,  Government
budget uncertainties and efforts to lower the federal budget deficit and defense
spending may adversely affect the Company. The Company believes,  however,  that
some  of  its  night-vision   products  and  development  work  incorporate  new
technology which the Government may use to update its existing equipment.

         In addition to its  night-vision  related design and  development,  the
Company designs, develops, and manufactures thin film coatings and performs thin
film  coatings  for use on  various  optical  products.  Many  of the  Company's
advanced  optical  design and  development  projects and the  manufacture of the
Company's medical and night-vision  products have been  significantly  dependent
upon the Company's thin film capabilities. Presently, optical thin film business
not  associated  with other  Company  business  and  products is limited or very
specialized.  However, the Company plans to aggressively pursue sales, marketing
and  technology  development  efforts for new optical  thin films in the rapidly
growing optical communications and semi-conductor  industries which may begin to
generate additional revenues in the first half of fiscal year 1998. In the third
and fourth  quarters of fiscal year 1997,  several  initial orders were received
for thin films from new costumers in these business areas. Also, during the last
half of fiscal year 1997, the Company began development of prototype  Wavelength
Division  Multiplexer  (WDM)  optical  filters.  (WDMs are  devices  that  allow
telecommunications  companies  to increase  the  transmission  capacity of fiber
optic lines).

         The Company has also  developed a  lens-prism  system which it has sold
for industrial use as part of an automated  registration system for machines and
has developed and sells a lens system for optical character reading.

         COMPETITION AND MARKETS

         The areas in which the  Company  engages  are  highly  competitive  and
include both foreign and domestic competitors. Many of the Company's competitors
are  larger  and  have   substantially   greater  resources  than  the  Company.
Furthermore,  other domestic or foreign companies,  some with greater experience
in the optics  industry and greater  financial  resources than the Company,  may
seek to produce products or services that compete with those of the Company. The
Company  may  establish  or use  production  facilities  overseas to produce key
components to the Company's business,  such as lenses. The Company believes that
the cost savings from such production may be essential to the Company's  ability
to compete on a price basis in the medical and night-vision  optics areas and to
the Company's  profitability,  and that the Company's  inability to establish or
maintain such  production  facilities  could  materially,  adversely  affect the
Company.

         The Company  believes  that  competition  for sales of its products and
services,  which  have  been  principally  sold to OEM  customers,  is  based on
performance  and other  technical  features,  as well as other factors,  such as
scheduling and reliability, in addition to competitive price.



                                       -4-

<PAGE>



         The Company  currently  sells its image  couplers,  beamsplitters,  and
adapters to a market that consists of  approximately 30 potential OEM customers.
These potential  customers sell video cameras,  endoscopes,  or  video-endoscopy
systems. The Company has made sales to approximately 20 of these customers.  The
Company  estimates  that it has  approximately  30% of the market share in these
products and anticipates growth in this area. The Company's primary  competition
in this area is the customers'  own in-house  capabilities  to manufacture  such
products.  The Company believes that these customers typically purchase products
from the Company,  despite their in-house  capabilities,  because they choose to
devote their own technical resources to their primary products,  such as cameras
or endoscopes. The Company estimates that approximately 50% of the market demand
for image couplers,  beamsplitters, and adapters is met by "captive" or in-house
capabilities.  The Company  anticipates  increased  demand for its  autoclavable
products   because  it  believes   there  is  a  trend  towards  more  stringent
sterilization of medical instruments.

         The Company has  marketed and sold its  endoscopes  to OEM video camera
and video endoscopy suppliers for resale under the purchaser's name. A number of
domestic and foreign competitors also sell endoscopes to such OEM suppliers, and
the Company's  share of the endoscope  market is nominal.  The Company  believes
that, while its resources are substantially more limited than these competitors,
the Company may be able to be more responsive to the needs of endoscope users.

         With respect to the Company's  advanced  optical design and development
services  not related to  night-vision  or thin film  coatings,  the Company has
numerous customers and competitors. The ability to supply design and development
services  to  such  customers  is  highly  dependent  upon a  company's  and its
employees' reputations and prior experience.

         With  respect  to  night-vision  optics,  the  Company's  sales  of its
products and services have been almost exclusively to one customer,  which sells
night-vision  equipment to the United  States Army.  The Company  faces  intense
competition for production of night-vision products from foreign  manufacturers.
In the night-vision  optical design area, the Company has numerous  competitors.
The Company's business in the night-vision  optics area is highly dependent upon
the Company's  reputation and performance,  as well as upon Government contracts
and policy.  The Company believes the demand for night-vision  optics generally,
which are used  extensively in drug and law enforcement and surveillance as well
as search and rescue  missions and military  applications,  will lessen.  Recent
experience  with lens sales for new consumer night vision products also suggests
that market growth in this area is severely limited.

         While the  potential  market for thin film  coatings  is  perceived  as
growing  rapidly,  particularly  in the  telecommunications  and  semi-conductor
industries,  the Company's thin film coatings  competitors are numerous and have
deep and broad capabilities.

         The Company has had negligible direct export sales to date.

         RESEARCH AND DEVELOPMENT

         The Company  believes that its future success depends to a large degree
on its ability to continue to conceive  and to develop new optical  products and
services  and  to  enhance  the  performance   characteristics  and  methods  of
manufacture of existing products. Accordingly, it expects to continue to


                                       -5-

<PAGE>



seek to obtain  product-related  design and development contracts with customers
and to invest its own funds on its research and development.

         The Company  received  approximately  $1,410,000 and $1,060,000 for the
fiscal  years ended June 30, 1997 and 1996,  respectively,  from  customers  for
customer-sponsored  design and development projects. Levels of customer contract
funded  research  and  development  can  fluctuate  greatly in any given  period
depending upon the mix between design efforts and hardware development, which is
generally more expensive and time consuming than the design phases.  In addition
to customer-sponsored research and development,  the Company spent approximately
$428,000  and  $433,000  of its own funds  during  fiscal  years  1997 and 1996,
respectively, on the Company's own research and development. The Company expects
to continue  making  significant  Company-funded  expenditures  for research and
development.

         RAW MATERIALS AND PRINCIPAL SUPPLIERS

         For all of the Company's products,  except for thin film coatings,  the
basic raw material is precision  grade optical glass,  which the Company obtains
from  several  major  suppliers.  Outside  vendors  grind and polish most of the
Company's  lenses and prisms.  For  optical  thin film  coatings,  the basic raw
materials are metals and dielectric compounds,  which the Company obtains from a
variety of chemical  suppliers.  The Company  believes that its demand for these
raw  materials  and  services  is small  relative  to the total  supply and that
materials and services required for the production of its products are currently
available in sufficient  production  quantities and will be available for fiscal
year  1998.  The  Company  believes,  however,  that  there are  relatively  few
suppliers  of the high  quality  lenses  and  prisms  which its  endoscopes  may
require.  Depending upon the market acceptance of the Company's endoscopes,  the
Company may seek to assure itself of a timely supply of lenses, prisms, or other
key materials or components  through the  acquisition  of a supplier or expanded
manufacturing facilities of its own.

         PATENTS AND TRADEMARKS

         The  Company  relies,  in  part,  upon  patents,   trade  secrets,  and
proprietary knowledge as well as personnel policies and employee confidentiality
agreements  concerning  inventions and other creative  efforts to develop and to
maintain  its  competitive  position.  The  Company  does not  believe  that its
business is dependent upon any patent,  patent pending, or license,  although it
believes  that trade secrets and  confidential  know-how may be important to the
Company's scientific and commercial success.

         The Company plans to file for patents,  copyrights,  and  trademarks in
the United  States and in  appropriate  countries  to protect  its  intellectual
property  rights whenever  possible.  The Company holds the rights to two United
States patents and has Japanese and German patent applications  pending relating
to one of its image  couplers and holds the rights to a United  States patent to
one of its endoscopes. The Company has received jointly with a customer a patent
relating to one of its night-vision  designs. The Company will assign its rights
under this night-vision  patent to such customer for night-vision  applications.
The Company knows of no infringements of its patents. Although the Company plans
to protect  any patents it has from  infringement,  it may not be able to pursue
such  protection  for  economic  reasons.  While the Company  believes  that its
pending  applications relate to patentable devices or concepts,  there can be no
assurance that patents will be issued or that


                                       -6-

<PAGE>



any patents issued can be successfully  defended or will  effectively  limit the
development of competitive products and services.

         Although  the  Company  seeks to protect its  proprietary  information,
there can be no assurance that others will not either develop  independently the
same  or  similar  information  or  gain  access  to the  Company's  proprietary
information  or that  disputes will not arise as to  proprietary  rights to such
information.

         The Company's  products may now or in the future  infringe upon others'
patents or  proprietary  technology.  The  Company's  defense of any such claims
could have a material, adverse effect on the Company.

         EMPLOYEES

         As of June 30, 1997, the Company had forty-five full-time employees and
two part-time employees.

         CUSTOMERS

         Sales to the Company's two largest  customers,  in terms of total sales
during fiscal year 1997, were  approximately 38% and 23%. Sales to the Company's
three largest  customers,  in terms of total sales during fiscal year 1996, were
approximately 42%, 14% and 12%.

         ENVIRONMENTAL PROTECTION AND THE EFFECT OF EXISTING OR PROBABLE
GOVERNMENT REGULATIONS ON THE BUSINESS

         The Company's  operations  are subject to a variety of federal,  state,
and local laws and  regulations  relating to the discharge of materials into the
environment  or otherwise  relative to the protection of the  environment.  From
time to time the  Company  uses a small  amount of  hazardous  materials  in its
operations.  Although the Company  believes that it complies with all applicable
environmental  laws and  regulations,  any  failure to comply with such laws and
regulations could have a material,  adverse effect on its capital  expenditures,
earnings, and competitive position.

         NEED FOR GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES AND
EFFECT OF EXISTING OR PROBABLE GOVERNMENT REGULATIONS ON THE BUSINESS

         The Company  currently  sells and markets  four medical  products,  the
marketing of which may require the permission of the United States Food and Drug
Administration ("FDA"). Pursuant to the Company's notification to the FDA of its
intent to market its  laparoscope,  additional  types of endoscopes which it has
developed and is developing, image coupler,  beamsplitter, and adapters, the FDA
has  determined  that each such device is  substantially  equivalent to a device
marketed in  interstate  commerce and that the Company may market such  devices,
subject to the general  controls  provisions of the Food, Drug and Cosmetic Act.
Furthermore,  the  Company  plans to market  additional  endoscopes  and related
medical  products that may require the FDA's permission to market such products.
The Company  may also  develop  additional  products or seek to sell some of its
current or future  medical  products  in a manner that  requires  the Company to
obtain  the  permission  of the  FDA to  market  such  products,  as well as the
regulatory approval or license of other federal, state, and local agencies or


                                       -7-

<PAGE>



similar agencies in other countries.  There can be no assurance that the Company
will be able to maintain the FDA's  permission to market its current products or
to obtain such  regulatory  permission,  approvals,  or licenses  for any of its
other  products.  Furthermore,  potential  adverse FDA regulation  affecting the
Company  which might  arise from future  legislation  or  administrative  action
cannot be predicted.  In addition, FDA regulations may be established that could
prevent or delay  regulatory  clearances or approval of the Company's  products.
The  inability  of the Company to secure any  necessary  licenses or  regulatory
approvals or permission from the FDA could have a material adverse effect on its
business. The FDA has authority to conduct detailed inspections of manufacturing
plants in order to assure that "good manufacturing practices" are being followed
in the manufacture of medical devices,  to require periodic reporting of product
defects to the FDA, and to prohibit  the  exploitation  of devices  which do not
comply with law. Failure to comply with applicable regulatory  requirements can,
among other things,  result in fines,  suspensions  of regulatory  clearances or
approvals, product recalls, operating restrictions, and criminal prosecution.

ITEM 2.  DESCRIPTION OF PROPERTY

         The Company  conducts  its domestic  operations  at two  facilities  in
Gardner and  Fitchburg,  Massachusetts.  The  Gardner  Facility is leased from a
corporation  owned by an  officer-shareholder-director  of the Company,  and the
Company's  lease expires in December  1999.  The  Fitchburg  facility is under a
three year lease which  commenced on November 1, 1995.  The Company rents office
space in Hong Kong for sales, marketing and supplier quality control and liaison
activities of its Hong Kong subsidiary.

         The Company  believes  these  facilities  are  adequate for its current
operations.  Significant  increases in production or the addition of significant
equipment  additions  or  manufacturing  capabilities  in  connection  with  the
production of the Company's  line of endoscopes,  optical thin films,  and other
products  may,   however,   require  the  acquisition  or  lease  of  additional
facilities.  The Company may establish  production  facilities  domestically  or
overseas  to produce  key  assemblies  or  components,  such as lenses,  for the
Company's products. Overseas facilities may subject the Company to the political
and economic risks associated with overseas operations. The loss of or inability
to establish or maintain such additional  domestic or overseas  facilities could
materially   adversely   affect   the   Company's   competitive   position   and
profitability.

ITEM 3.  LEGAL PROCEEDINGS

         The Company and its  subsidiaries  and their  property are not party or
subject to any material pending legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of the Company's  security  holders
during the fourth quarter of fiscal year 1997.




                                       -8-

<PAGE>



                 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
<S>                                                          <C>

                                                              Position with the Company
Name                                                          or Principal Occupation


Richard E. Forkey                                             President, Treasurer, and
                                                              Director

Jack P. Dreimiller                                            Senior Vice President,
                                                              Finance and Chief Financial
                                                              Officer

Kumar M. Khajurivala                                          Vice President, Operations

Edward A. Benjamin                                            Director and Clerk.  Mr. Benjamin is a partner
                                                              in the law firm of Ropes & Gray, Boston,
                                                              Massachusetts

Joel R. Pitlor                                                Director.  Mr. Pitlor is president of J.R. Pitlor,
                                                              a management consulting firm based in
                                                              Cambridge, Massachusetts.

Robert R. Shannon                                             Director.   Mr. Shannon is a professor at the
                                                              Optical Sciences Center of the University of
                                                              Arizona in Tuscon, Arizona.
</TABLE>




                                       -9-

<PAGE>



                                     PART II

ITEM 5.           MARKET FOR COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS

         The  Company's  common  stock  currently  trades  on the  Boston  Stock
Exchange  under the symbol  "POC" and is listed on the National  Association  of
Securities Dealers Automated  Quotation (NASDAQ) System under the symbol "POCI."
From January 1991 to December  1991, the Boston Stock Exchange was the principal
market in which the  Company's  stock was publicly  traded.  Since January 1992,
NASDAQ has been the principal  market in which the  Company's  stock is publicly
traded.  The high and low sales  prices  for the  Company's  stock for each full
quarterly period within the two most recent fiscal years were as follows:
<TABLE>
<CAPTION>
<S>              <C>                  <C>                 <C>                    <C>

                        1996                                           1997
                        ----                                           ----

Quarter           High                 Low                  High                 Low
                  ---------------------------------------------------------------------

First             $1 7/8               $1 1/8               $1 3/4               $ 7/8

Second            $1 7/8               $1 1/4               $1 3/4               $1 1/8

Third             $2                   $1 1/4               $1 15/16             $1 1/16

Fourth            $2                   $1 1/8               $3 11/16             $1 1/8

</TABLE>

         As of August 31, 1997, there were 99 holders of record of the Company's
common stock.

ITEM 6.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS

IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS

         When  used in this  discussion,  the words  "believes",  "anticipates",
"intends to", and similar  expressions are intended to identify  forward-looking
statements. Such statements are subject to certain risks and uncertainties which
could  cause  actual  results to differ  materially  from those  projected.  See
"Important  Factors  Regarding  Forward-Looking  Statements"  attached hereto as
Exhibit 99 and  incorporated  herein by reference.  Readers are cautioned not to
place undue reliance on these forward-looking  statements which speak only as of
the date hereof.  The Company  undertakes no obligation to publicly  release the
result of any revision to these forward-looking  statements which may be made to
reflect  events  or  circumstances  after  the date  hereof  or to  reflect  the
occurrence of unanticipated events.



                                      -10-

<PAGE>



LIQUIDITY AND CAPITAL RESOURCES

         For the  year  ended  June  30,  1997,  the  Company's  cash  and  cash
equivalents decreased by approximately  $269,000 to $2,348,000.  The decrease in
cash and cash  equivalents was due to cash generated by operating  activities of
approximately  $290,000 and proceeds  received from exercise of stock options of
approximately  $57,000,  less capital  expenditures of  approximately  $445,000,
increases in other  assets,  primarily  patents,  of  approximately  $89,000 and
repayment of a capital lease obligation of approximately $82,000.

         The  Company  intends to continue  devoting  significant  resources  to
internally-funded research and development spending on both new products and the
improvement of existing  products.  The Company also intends to devote resources
to the  marketing  and product  support of its  medical  and  optical  thin film
product  lines,  and the  development  of new  methods  of  distribution.  These
investments  may  temporarily  result in  negative  cash flow,  but the  Company
anticipates  that the results of these  efforts will  translate  into  increased
revenues and profits.

         Furthermore,  depending  upon the market  acceptance  of the  Company's
products,  the  Company  believes  that  it  may be  obligated  to  acquire  new
facilities,  add additional manufacturing or research and development equipment,
or acquire a business  that  manufactures  or sells to the  Company  components,
materials,   supplies,   or  services  used  in  the   manufacture,   marketing,
distribution  or  servicing  of the  Company's  new  products,  as  well  as the
Company's existing products.

         The Company  continues to maintain a secured line of credit of $500,000
available with a bank at 1/4% over the prime rate.

         The Company's cash and cash  equivalents  and available lines of credit
are considered  sufficient to support working  capital and investment  needs for
the foreseeable future.

RESULTS OF OPERATIONS

         Total revenues for fiscal year 1997 were  approximately  $7,372,000,  a
decrease of approximately $683,000, or 8.5%, from fiscal year 1996.

         The revenue  decrease  was due to lower sales of  non-medical  products
(down 29%),  partially  offset by higher sales of medical products (up 22%). The
increase in sales of medical  products was  attributable  to higher sales in all
major product  categories.  The reduction in non-medical sales was due primarily
to (1) lower sales of night-vision  products due to completion of two government
production subcontracts and one government development subcontract and (2) lower
sales  of  industrial  products  due  to  discontinued  sales  to a  significant
customer, both partially offset by higher sales of optical thin films.

         Gross profit decreased by  approximately  $701,000 in fiscal year 1997,
and as a percentage of revenues  decreased  from 30.6% to 23.9%  compared to the
previous year. The decrease in gross profit was due primarily to the lower sales
volume and higher occupancy and  depreciation  expenses related to equipment and
manufacturing facilities additions.



                                      -11-

<PAGE>



         For the fiscal years ended June 30, 1997, 1996 and 1995,  approximately
38%, 44% and 45% of the Company's  total  revenues,  respectively,  were derived
from  production  and  development  contracts  and  subcontracts  involving  the
Government  and its  agencies.  The  Company's  current  Government  business is
substantially  comprised  of a  development  subcontract  with one customer on a
cost-plus-fixed-fee  basis extending  approximately through April, 1998, and two
fixed-price production  subcontracts with another customer for night-vision lens
systems  with  deliveries  scheduled   approximately   through  May,  1998.  The
Government  may  terminate a  government  contract at any time,  with or without
cause. After expiration of the current  subcontracts,  there can be no assurance
that the Government will award future contracts or subcontracts to the Company.

         Selling, general and administrative expenses increased by approximately
$169,000 or 7.9% in fiscal year 1997 compared to fiscal year 1996.  The increase
was due  primarily  to  higher  spending  on  advertising  and bid and  proposal
expenses  targeted  at the  industrial  and thin films  marketplace,  and higher
legal, consulting and employee recruiting expenses.

         Interest  expense  relates   primarily  to  capital  lease  obligations
incurred in the third quarter of fiscal years 1994 and 1996.

         Interest income decreased by approximately  $20,000 in fiscal year 1997
due to the lower investment base of cash equivalents.

         The benefit for income  taxes as a  percentage  of the pre-tax  loss in
fiscal year 1997 is lower than the federal  statutory  income tax rate primarily
due to inability  to recognize  the full amount of deferred tax assets to offset
prior years'  taxable  income.  Such tax benefits  will be  recognized in future
years if sufficient future taxable income is generated.

FISCAL YEAR 1996 RESULTS OF OPERATIONS

         Total revenues for fiscal year 1996 were approximately  $8,055,000,  an
increase of approximately $477,000, or 6.3%, over fiscal year 1995.

         The  revenue  increase  over the prior year was due to higher  sales of
medical products (up 30.3%) and higher sales of night-vision products (up 1.8%),
partially  offset  by lower  sales of  industrial  products  (down  23.2%).  The
increase in sales of medical products was primarily attributable to higher sales
of  endocouplers,  which  increased  by 89% for the year to record  levels.  The
reduction in  industrial  sales was due  primarily to lower sales of  industrial
lenses to a significant  customer.  This customer accounted for 12%, 18%, and 7%
of  the  Company's  total  revenues  for  fiscal  years  1996,  1995  and  1994,
respectively.

         Gross profit decreased by  approximately  $123,000 in fiscal year 1996,
and as a percentage of revenues,  decreased  from 34.1% to 30.6% compared to the
previous  year. The decrease in gross profit was due primarily to an unfavorable
shift in sales mix away from industrial  products,  which have relatively higher
gross margins than other product lines,  and higher  occupancy and  depreciation
expenses related to equipment and manufacturing facilities additions.

         Selling, general and administrative expenses increased by approximately
$191,000 or 10% in fiscal year 1996  compared to fiscal year 1995.  The increase
was due primarily to higher spending on


                                      -12-

<PAGE>



new product research and development,  principally  related to medical products,
which  increased by 19% to  approximately  $433,000 in fiscal year 1996,  higher
advertising  expenditures  targeted at the  industrial  marketplace,  and higher
depreciation and amortization expenses.

         Interest  expense  relates   primarily  to  capital  lease  obligations
incurred in the third quarter of fiscal years 1994 and 1996.

         Interest income increased by approximately  $32,000 in fiscal year 1996
due to the higher investment base of cash equivalents and higher interest rates.

         The  provision  for income taxes as a percentage  of pre-tax  income is
lower than the federal statutory income tax rate primarily due to recognition of
available tax credits and future tax deductions not previously benefited.

OTHER FACTORS THAT MAY AFFECT FUTURE RESULTS

         The Company  continues to  aggressively  pursue sales,  marketing,  and
technology development efforts for new optical thin films in the rapidly growing
telecommunications and semi-conductor  industries,  which will begin to generate
modest incremental revenues in the last half of this calendar year. In the third
and fourth  quarters of fiscal year 1997,  several  initial orders were received
for thin films from new customers in these business areas.  Development  efforts
on  prototype   Wavelength  Division   Multiplexer  (WDM)  optical  filters  are
continuing.

         Although the Company had experienced substantial growth in its sales of
endocouplers  during the six months ending  December 31, 1996,  these sales have
been largely dependent upon a relatively new application for these  instruments.
While the Company  believes  that  prospects  for  continued  success of the new
endocoupler  application are good,  recent demand for  endocouplers has softened
due  primarily to technical  problems in a customer's  product  which is used in
conjunction  with the Company's  endocouplers.  Consequently,  no shipments were
made to this customer  during the six months ending June 30, 1997,  and none are
scheduled  for the  quarter  ending  September  30,  1997.  The Company has been
advised by this  customer,  who accounted for 23% of the Company's  revenues for
the year ending June 30,  1997,  that  although  the  technical  problems in its
product have recently been corrected, additional orders for endocouplers will be
deferred until it consumes its existing stock of endocouplers.

ITEM 7.            CONSOLIDATED FINANCIAL STATEMENTS:  The Consolidated
Financial Statements are filed on pages 14 to 28 of this Form 10-KSB.



                                      -13-

<PAGE>













               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                        Consolidated Financial Statements
                          as of June 30, 1997 and 1996
                         Together with Auditors' Report




                                      -14-

<PAGE>



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Precision Optics Corporation, Inc.:

We have audited the accompanying consolidated balance sheets of Precision Optics
Corporation,  Inc. (a Massachusetts corporation) and subsidiaries as of June 30,
1997  and  1996,  and  the  related   consolidated   statements  of  operations,
stockholders'  equity and cash  flows for each of the three  years in the period
ended June 30, 1997. These financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of Precision Optics  Corporation,
Inc.  and  subsidiaries  as of June 30, 1997 and 1996,  and the results of their
operations  and their cash flows for each of the three years in the period ended
June 30, 1997, in conformity with generally accepted accounting principles.


ARTHUR ANDERSEN LLP


Boston, Massachusetts
July 31, 1997



                                      -15-

<PAGE>

<TABLE>




                                            PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                                            CONSOLIDATED BALANCE SHEETS--JUNE 30, 1997 AND 1996
<CAPTION>
<S>                                   <C>           <C>          <C>                                 <C>              <C>           




                         ASSETS           1997          1996     LIABILITIES AND STOCKHOLDERS' EQUITY      1997            1996
CURRENT ASSETS:                                                  CURRENT LIABILITIES:
   Cash and cash equivalents        $  2,348,382  $  2,617,813
   Marketable Securities                  30,000       -          Accounts payable                    $    271,911    $   829,428
   Accounts receivable (net of                                    Accrued payroll                           81,122         81,990
   allowance for doubtful accounts                                Accrued profit sharing and bonuses        30,000         93,938
   of approximately $69,000 and                                   Accrued professional services             85,556         49,360
   $82,000 in l997 and 1996,                                      Accrued vacation                          64,903         51,881
   respectively)                         466,811     1,139,804    Accrued warranty expense                  50,000         50,000
   Inventories                         1,576,967     1,863,694    Accrued income taxes                      18,946         35,383
   Deferred tax asset                    157,300       119,000    Other accrued liabilities                 42,164         51,638
   Prepaid expenses                       40,273        44,684    Current portion of capital
   Refundable income taxes                52,970        30,276    lease obligation                          89,532         82,678  
                                       ----------      --------                                            --------       --------
                                                                  
                                                                  

   Total current assets                4,672,703     5,815,271    Total current liabilities                734,134       1,326,296
                                       ---------     ---------                                            ---------      ---------

PROPERTY AND EQUIPMENT, AT COST:
   Machinery and equipment             2,474,478     2,049,758   CAPITAL LEASE OBLIGATION, NET           
                                                                 OF CURRENT PORTION                        189,413        278,949
   Leasehold improvements                 433,832      420,230                                             --------      ---------
   Furniture and Fixtures                 109,568      102,976
   Vehicles                                44,742       44,742
                                        ---------     ---------
                                        3,062,620    2,617,706   COMMITMENTS (Note 4)

   Less--Accumulated depreciation       1,927,578     1,531,228
   and amortization                     ---------     ---------
                                        1,135,042     l,086,478
                                        ---------     ---------   STOCKHOLDERS' EQUITY:
                                                                  Common stock, $.01 par value-
OTHER ASSETS:                                                     Authorized--10,000,000 shares
   Cash surrender value of life                                   Issued and outstanding--6,021,502
   insurance policies                      51,871        52,851   and 5,980,502 shares at June 30,
   Patents, net                           155,986       125,995   1997 and 1996, respectively               60,215         59,805
   Deferred costs, net                        -           2,025   Additional paid-in capital             5,202,558      5,145,655
                                 
                                                                  Retained (deficit) earnings             (170,718)       271,915
                                        ----------     --------                                          ---------      ---------

   Total other assets                      207,857     180,871    Total stockholders' equity             5,092,055      5,477,375
                                         ---------    ---------                                          ---------      ---------

                                     $   6,015,602  $7,082,620                                        $  6,015,602    $ 7,082,620
                                        =========    =========                                           =========       =========

</TABLE>

       The  accompanying  notes are an integral part of these consolidated
financial statements.




                                       16


<PAGE>
<TABLE>


                                PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                 FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<CAPTION>
<S>                                                                <C>                <C>              <C>



---------
                                                                           1997               1996               1995

REVENUES                                                            $    7,372,310     $    8,055,271    $    7,578,097

COST OF GOODS SOLD                                                       5,610,438          5,592,871         4,992,785
                                                                         ---------          ---------         ---------

           Gross profit                                                  1,761,872          2,462,400         2,585,312

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                             2,296,687          2,128,155         1,937,497
                                                                         ---------          ---------         ---------

         Operating (loss) income                                         (534,815)            334,245           647,815         

INTEREST EXPENSE                                                          (27,241)            (16,639)          (9,598)

Interest Income                                                           104,423             124,104            92,499
                                                                       ------------        ------------       ----------

         (Loss) Income before provision for income taxes                 (457,633)            441,710           730,716       

(Benefit) Provision for Income Taxes                                      (15,000)             36,000           150,000
                                                                       ------------        ------------       ----------  
         Net (loss) income                                           $   (442,633)       $    405,710      $    580,716
                                                                      ============       ============      ============

(LOSS) INCOME PER COMMON AND COMMON EQUIVALENT SHARE                       $(.07)              $.07              $.10

                                                                    ==============     ==============     ==============

WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING                                                       5,982,210          6,116,569          6,066,366
                                                                       ===========        ===========        ===========
</TABLE>


               The accompanying notes are an integral part of these consolidated
financial statements.



                                       17


<PAGE>




               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
<S>                                   <C>                  <C>                 <C>                 <C>               <C>


                                                                                   ADDITIONAL        RETAINED            TOTAL
                                         NUMBER OF              COMMON               PAID-IN        (DEFICIT)         STOCKHOLDERS
                                           SHARES               STOCK                CAPITAL         EARNINGS            EQUITY
BALANCE, JUNE 30, 1994                       5,980,502           $  59,805      $  4,997,655       $(714,511)        $   4,342,949
     Tax benefit from exercise of
     options to purchase common
     stock                                           -                   -           148,000            -                  148,000
     Net Income                                      -                   -               -           580,716               580,716
                                      ----------------      --------------      --------------      ------------       -------------
BALANCE, JUNE 30, 1995                       5,980,502              59,805         5,145,655        (133,795)            5,071,665
     Net Income                                      -                   -               -           405,710               405,710
                                      ----------------      --------------      --------------      ------------       -------------
BALANCE, JUNE 30, 1996                       5,980,502              59,805         5,145,655         271,915             5,477,375
     Proceeds from exercise of
     options to purchase common
     stock                                      41,000                 410            56,903            -                   57,313
     Net loss                                        -                   -               -          (442,633)             (442,633)
                                      ----------------      --------------      --------------      ------------       -------------
BALANCE, JUNE 30, 1997                       6,021,502           $  60,215       $ 5,202,558       $(170,718)        $   5,092,055
                                      ================      ==============      ==============      ============      =============


                The   accompanying   notes  are  an   integral   part  of  these consolidated financial statements.
</TABLE>



                                                         -18-

<PAGE>





               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                FOR THE YEARS ENDED JUNE 30, 1997, 1996 AND 1995

<TABLE>


                                
<CAPTION>
<S>                                                                  <C>           <C>            <C>

                                                                          1997           1996           1995
  CASH FLOWS FROM OPERATING ACTIVITIES:
    Net (loss) income                                                $  (442,633)   $   405,710    $  580,716
    Adjustments to reconcile net (loss) income to net cash provided
    by operating activities-
       Depreciation and amortization                                     428,054        308,275       184,849                     
       Deferred income taxes                                             (38,300)       (67,000)      (52,000)
       Changes in assets and liabilities-
           Accounts receivable                                           672,993        276,567      (123,485)                     
           Inventories                                                   286,727       (395,215)       86,378
           Prepaid expenses                                                4,411        (21,810)       (4,091)
           Refundable income taxes                                       (22,694)       (30,276)           -
           Accounts payable                                             (557,517)       361,467        16,732
           Accrued payroll                                                  (868)        16,984        (5,527)
           Accrued profit-sharing and bonuses                            (63,938)       (46,062)      140,000
           Accrued professional services                                  36,196            505        (3,238)
           Accrued income taxes                                          (16,437)       (15,401)       47,722
           Other accrued liabilities                                       3,548         22,933       (22,108)
                                                                      -----------     ------------   ------------

              Net cash provided by operating activities                  289,542        816,677       845,948
                                                                      -----------     -----------    -----------

  CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of marketable securities                                   (30,000)          -               -
    Purchases of property and equipment                                 (444,914)      (615,798)     (115,602)    
    Increase in other assets                                             (58,690)       (59,844)      (47,717)
                                                                    ------------     -----------    ------------

              Net cash used in investing activities                     (533,604)      (675,642)     (163,319)
                                                                    ------------     -----------    -----------

  CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayment of capital lease obligation                                (82,682)       (51,068)      (26,603)
    Tax benefit from stock options exercised                                 -             -          148,000
    Proceeds from exercise of stock options                               57,313           -               -
                                                                   --------------- ---------------   ------------

              Net cash (used in) provided by financing activities        (25,369)       (51,068)      121,397
                                                                     -----------     ------------   ------------

  NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                  (269,431)        89,967       804,026

  CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                         2,617,813      2,527,846     1,723,820
                                                                      -----------    ------------   -----------

  CASH AND CASH EQUIVALENTS, END OF YEAR                             $ 2,348,382    $ 2,617,813   $ 2,527,846
                                                                      ===========     ==========    ==========

  SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Cash paid during the year for-
       Interest                                                      $    27,241    $    16,639   $     9,598
                                                                      ============    ==========     ============
       Income taxes                                                  $   101,461    $   151,325   $     6,278
                                                                      ===========     ===========    ============

  SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTMENT ACTIVITIES:
    Capital lease obligation                                         $      -       $   299,180   $        -
                                                                     ============    ============    ===========
</TABLE>


              The accompanying  notes are an integral part of these consolidated
financial statements.



                                      -19-

<PAGE>





               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997



(1)      Summary of Significant Accounting Policies

         (a)      Nature of Business

                  Precision  Optics  Corporation,  Inc. (the  Company)  designs,
                  manufactures  and  sells  optical   systems,   components  and
                  thin-film  coatings.  The  Company  conducts  business  in one
                  industry   segment  only  and  its   customers  are  primarily
                  domestic.  The  Company's  products and services fall into two
                  principal  areas:  medical  products for use by hospitals  and
                  physicians, and advanced optical system design and development
                  services  and  products,   primarily   under  contract  either
                  directly or indirectly with the United States Government.

         (b)      Principles of Consolidation

                  The accompanying consolidated financial statements include the
                  accounts of the Company and its two wholly owned subsidiaries.
                  All significant  intercompany  accounts and transactions  have
                  been eliminated in consolidation.

         (c)      Revenues

                  Revenues  for  industrial  and  medical  products  sold in the
                  normal  course  of  business  are  recognized  upon  shipment.
                  Contract     revenues     are     recognized     under     the
                  percentage-of-completion  method. The percentage of completion
                  is determined  by computing the  percentage of the actual cost
                  of work performed to the anticipated  total contract costs, or
                  on the basis of units shipped. When the estimate on a contract
                  indicates a loss, the Company's policy is to record the entire
                  loss in the current period.

         (d)      Cash and Cash Equivalents

                  The Company  includes in cash  equivalents  all highly  liquid
                  investments  with original  maturities of three months or less
                  at the time of acquisition.  Cash equivalents at June 30, 1997
                  and 1996  include  approximately  $1,529,000  and  $1,455,000,
                  respectively, of United States Treasury bills.

         (e)      Marketable Securities

                  Marketable  securities  consist of equity  securities  and are
                  carried at the lower of aggregate cost or market value.




                                      -20-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)



         (f)      Inventories

                  Inventories  are  stated  at  the  lower  of  cost
                  (first-in, first-out)   or  market  and include   material, 
                  labor  and manufacturing  overhead.  The components of 
                  inventories are as follows at June 30, 1997 and 1996:
<TABLE>
<CAPTION>
                                  <S>                         <C>                      <C>

                                                                    1997                      1996

                                    Raw material               $  1,075,294             $    1,282,924
                                    Work -in-progress               272,980                    502,658
                                    Finished goods                  228,693                     78,112
                                                              -------------              --------------
                                                               $  1,576,967                $  1,863,694

                                                               ============                ============
</TABLE>

         (g)      Depreciation and Amortization

                  The Company  provides for  depreciation  and  amortization  by
                  charges   to   operations,   using   the   straight-line   and
                  declining-balance methods, which allocate the cost of property
                  and equipment over the following estimated useful lives:

                                                                     ESTIMATED
                               ASSET CLASSIFICATION                 USEFUL LIFE

                           Machinery and equipment                    5-7 years
                           Leasehold improvements                  Life of lease
                           Furniture and fixtures                       5 years
                           Vehicles                                     3 years

         (h)      Significant Customers and Concentration of Credit Risk

                  Statement of Financial  Accounting  Standards  (SFAS) No. 105,
                  Disclosure of Information  About  Financial  Instruments  with
                  Off-Balance-Sheet   Risk  and   Financial   Instruments   with
                  Concentrations  of Credit  Risk,  requires  disclosure  of any
                  significant  off-balance sheet and credit risk concentrations.
                  Financial  instruments that subject the Company to credit risk
                  consist  primarily  of cash and  cash  equivalents  and  trade
                  accounts  receivable.  The Company  places its  investments in
                  highly  rated  financial  institutions.  The  Company  has not
                  experienced  any losses on these  investments to date. At June
                  30,  1997 and 1996,  receivables  from the  Company's  largest
                  customer were  approximately 29% and 58% of the total accounts
                  receivable,  respectively. The Company has not experienced any
                  material losses related to accounts receivable from individual
                  customers.



                                      -21-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)



                  Revenues  from  the  Company's  two  largest   customers  were
                  approximately 38% and 23%, respectively, of total revenues for
                  the year  ended June 30,  1997.  Revenues  from the  Company's
                  three largest customers were  approximately  42%, 14% and 12%,
                  respectively,  of total  revenues  for the year ended June 30,
                  1996.  Revenues from the Company's two largest  customers were
                  approximately 43% and 18%, respectively, of total revenues for
                  the year ended June 30, 1995. No other customers accounted for
                  more than 10% of the  Company's  revenues in each of the three
                  years ended June 30, 1997.  Approximately  38%, 44% and 45% of
                  the Company's revenues for the years ended June 30, 1997, 1996
                  and 1995, respectively, were derived from sales to agencies of
                  the  government  or  customers  that  supply  agencies  of the
                  government.

         (i)      Research and Development

                  Research  and  development   costs,   which  are  expensed  as
                  incurred, are included in selling,  general and administrative
                  expenses and include  direct costs plus  overhead.  Such costs
                  totaled approximately $428,000,  $433,000 and $363,000 for the
                  years ended June 30, 1997, 1996 and 1995, respectively.

         (j)      Income (Loss) per Common and Common Equivalent Share

                  Income  (loss)  per  common  and  common  equivalent  share is
                  computed  based on the weighted  average  number of common and
                  common equivalent shares (if dilative) outstanding during each
                  year.  The  difference  between the  weighted  average  shares
                  outstanding under the primary and fully diluted methods is not
                  significant.

                  In March 1997, the Financial Accounting Standards Board (FASB)
                  issued  SFAS  No.  128,  Earnings  per  Share.  SFAS  No.  128
                  establishes  standards for computing and  presenting  earnings
                  per share and applies to entities  with  publicly  held common
                  stock.  This  statement is  effective  for fiscal years ending
                  after  December 15, 1997 and early  adoption is not permitted.
                  When adopted,  the statement will require restatement of prior
                  years'  earnings  per  share.  The  Company  will  adopt  this
                  statement  for  its  fiscal  year  ended  June  30,  1998.  In
                  addition,  the Company  believes that the adoption of SFAS No.
                  128  including  the effect on prior  periods,  will not have a
                  material effect on its financial statements.



                                      -22-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)




         (k)      Stock-Based Compensation

                  The Company  accounts for its stock-based  compensation  under
                  Accounting  Principals  Board Opinion No. 25,  Accounting  for
                  Stock Issued to Employees.  In October  1995,  the FASB issued
                  SFAS No. 123, Accounting for Stock-Based  Compensation,  which
                  is effective  for fiscal years  beginning  after  December 15,
                  1995.  SFAS No. 123 establishes a  fair-value-based  method of
                  accounting for stock-based compensation plans. The Company has
                  adopted the  disclosure-only  alternative  under SFAS No. 123,
                  which  required  the  disclosure  of the pro forma  effects on
                  earnings  and   earnings  per  share  as  if  the   accounting
                  prescribed  by SFAS  No.  123  had  been  adopted,  as well as
                  certain other information.

         (l)      Foreign Currency Translation

                  The  Company   translates   certain   accounts  and  financial
                  statements of its foreign  subsidiary in accordance  with SFAS
                  No. 52, Foreign Currency Translation.  The functional currency
                  of the  Company's  foreign  subsidiary  is the  United  States
                  dollar. Accordingly, translation gains or losses are reflected
                  in the accompanying  consolidated statements of operations and
                  have not been significant.

         (m)      Other Assets

                  Patents  and  deferred   costs  are  carried  at  cost,   less
                  accumulated  amortization of approximately $71,000 and $60,000
                  at June 30,  1997  and  1996,  respectively.  Such  costs  are
                  amortized using the  straight-line  method over their legal or
                  estimated useful lives, generally five to ten years.

         (n)      Use of Estimates

                  The  preparation  of financial  statements in conformity  with
                  generally accepted  accounting  principles requires management
                  to make  estimates  and  assumptions  that affect the reported
                  amounts of assets and liabilities and disclosure of contingent
                  assets and liabilities at the date of the financial statements
                  and the reported  amounts of revenues and expenses  during the
                  reporting  period.  Actual  results  could  differ  from those
                  estimates.

(2)      Line of Credit

         At June 30, 1997,  the Company had available a demand line of credit of
         $500,000  at an interest  rate equal to the bank's  prime rate (8.5% at
         June 30, 1997) plus 0.25%. At June 30, 1997, there


                                      -23-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)



         were no borrowings  outstanding  under this line of credit.  Borrowings
         under this line of credit are secured by all assets of the Company. The
         line of credit  expires on  November  30,  1997;  however,  the Company
         anticipates its renewal.

(3)      Capital Lease Obligation

         At June 30, 1997,  future  minimum lease  payments  under capital lease
obligations are as follows:
<TABLE>
<CAPTION>
<S>         <C>                                                               <C>


FISCAL YEAR                                                                        AMOUNT
1998                                                                             $  109,000
1999                                                                                 93,920
2000                                                                                 72,808
2001                                                                                 42,474
                                                                                -----------

            Total minimum lease payments                                            318,202

Amount representing interest                                                       (39,257)
                                                                                -----------

            Present value of minimum lease payments                                 278,945

Less--Current portion                                                                89,532
                                                                                -----------

                                                                                 $  189,413
                                                                                ===========
</TABLE>

         Capital  leases  are  secured  by all  assets  of the  Company  under a
         security agreement subordinate to the Company's demand line of credit.

(4)      Related Party Transactions and Commitments

         The Company leases one of its facilities from a corporation owned by an
         officer of the Company. The lease, that was renewed during fiscal 1995,
         terminates in December 1999 and requires  lease  payments of $9,000 per
         month.  The  Company  may  terminate  the  lease  as of the  end of any
         calendar year during the term by providing written notice to the lessor
         by June 30 of such year.

         Total future  minimum rental  payments  under all operating  leases for
         fiscal 1998 are $223,000.

         Rent expense on operating leases was approximately  $213,000,  $187,000
         and  $144,000  for the  years  ended  June 30,  1997,  1996  and  1995,
         respectively.



                                      -24-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)



         The Company  paid fees to a director of  approximately  $60,000  during
         each of fiscal 1997,  1996 and 1995 for  consulting  services.  Another
         director is a partner in a law firm that has performed  legal  services
         for the Company during fiscal 1997, 1996 and 1995.

(5)      Stockholders' Equity

         In  conjunction  with previous  equity  offerings,  the Company  issued
         warrants to acquire a total of 320,000 shares of common stock, of which
         warrants for a total of 100,000  shares  expired during fiscal 1997 and
         1996.  Warrants for 220,000  shares expire on October 23, 1998 and have
         an  exercise  price of $1.375 per share.  As of June 30,  1997,  all of
         these warrants were exercisable.

         During 1989, the  stockholders  approved a stock option plan (the Plan)
         for key  employees.  The  Plan,  as  amended,  authorizes  the grant of
         options to  purchase up to  1,110,000  shares of the  Company's  common
         stock at an exercise  price not less than 100% of the fair market value
         per share at the date of grant.  Options  granted are exercisable for a
         period  determined  by the Board of  Directors,  not to exceed 10 years
         from the date of grant. At June 30, 1997, 10,748 shares of common stock
         were available for future grants under the Plan.

         The  following is a summary of  transactions  in the Plan for the three
         years ended June 30, 1997:
<TABLE>
<CAPTION>
<S>                    <C>                                         <C>                     <C>                    <C>

                                                                        NUMBER                 OPTION PRICE         WEIGHTED AVERAGE
                                                                       OF SHARES                 PER SHARE          EXERCISE PRICE

                        Options outstanding, June 30, 1994                295,000           $  3.50-$5.6875        $      4.76
                           Granted                                        395,000                  1.375                  1.38
                           Canceled                                      (295,000)             3.50-5.6875                4.76
                                                                      -----------              -------------         ---------------

                        Options outstanding, June 30, 1995                395,000                  1.375                  1.38
                           Granted                                         60,000              1.375-1.50                 1.40
                                                                       ----------              --------------        ---------------

                        Options outstanding, June 30, 1996                455,000              1.375-1.50                 1.38
                           Granted                                        190,000             1.5625-2.1875               1.89
                           Exercised                                      (41,000)            1.3750-1.5625               1.40
                                                                        ---------             ---------------        ---------------

                        Options outstanding, June 30, 1997                604,000             1.375 - 2.1875              1.54   
                                                                        ---------             --------------          -------------

                        Options exercisable, June 30, 1997                308,500           $ 1.375 - $2.1875             1.46

                                                                        =========            ================         =============

</TABLE>


         In  addition,  the  Company  has  granted  options  outside  the  Plan,
         primarily to directors and consultants at 100% of the fair market value
         per share at the date of grant.  During fiscal 1995, options for 30,000
         shares at $1.375 per share,  including options for 15,000 shares issued
         to replace  existing  options,  were  granted to two  directors  of the
         Company,  which became  exercisable  in four equal annual  installments
         beginning on


                                      -25-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)



         December 15, 1994.  Also during fiscal 1995,  options for 35,000 shares
         at $1.375 per share,  including  options  for 15,000  shares  issued to
         replace  existing  options,  were  granted to two  consultants  and one
         former employee of the Company; 15,000 such options were exercisable at
         December 15, 1994, and options for 20,000 shares became  exercisable in
         four equal annual  installments  beginning on December 15, 1994. During
         fiscal 1996,  options for 60,000 shares at $1.30 per share were granted
         to a consultant to the Company,  which became exercisable in five equal
         annual  installments  beginning on July 31, 1995.  As of June 30, 1997,
         options  outside  the Plan  for  221,617  shares  were  outstanding  at
         exercise  prices  ranging  from  $.067 to  $5.6875  per  share,  with a
         weighted  average  exercise price of $1.45 per share,  of which 173,117
         were exercisable within the same exercise price range.

         The Company has computed the pro forma disclosures  required under SFAS
         No. 123 for all stock options granted in 1997 and 1996 using the Black-

Scholes option pricing model prescribed by SFAS No. 123.

         The assumption used and the weighted average  information for the years
         ended June 30, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
<S>          <C>                                                 <C>               <C>


                                                                         YEARS ENDED


                                                                    1997             1996

              Risk-free interest rates                              6.95%            6.83%
              Expected dividend yield                                 -                -
              Expected lives                                       7 years          7 years
              Expected volatility                                    87%              87%
              Weighted-average remaining contractual life of
                options outstanding                               8.16 years       8.57 years

         The effect of applying SFAS No. 123 would be as follows:
</TABLE>

<TABLE>
<CAPTION>
<S>                            <C>                           <C>                <C>


                                                                    1997              1996


                                 Net (loss) income
                                     As reported                $  (442,633)      $   405,710
                                     Pro forma                     (520,373)          391,610

            
                                 Net (loss) income per share
                                     As reported                $      (.07)      $       .07
                                     Pro forma                         (.09)              .06
</TABLE>



                                      -26-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)



    (6)  Income Taxes

         The Company  accounts for income taxes in accordance with SFAS No. 109,
         Accounting for Income Taxes,  whereby a deferred tax asset or liability
         is  measured  by the enacted tax rates that would be in effect when any
         differences between the financial statement and tax bases of assets and
         liabilities reverse.

         The  (benefit)   provision   for  income  taxes  in  the   accompanying
         consolidated statements of operations consists of the following for the
         three years ended June 30, 1997:

<TABLE>
<CAPTION>
                    <S>                                        <C>               <C>             <C>


                                                                    1997             1996              1995

                     Current-
                         Federal                                 $  26,300         $  67,000      $  52,000      -
                         State                                       1,000             3,000            -
                         Foreign                                    (4,000)           33,000          2,000
                                                                ----------        ----------      -----------
                                                                    23,300           103,000         54,000
                                                                ----------        ----------      -----------
                     Deferred-
                         Federal                                  (34,300)          (57,000)        (44,000)
                         State                                     (4,000)          (10,000)         (8,000)
                                                                ----------        ----------      ----------
                                                                  (38,300)          (67,000)        (52,000)
                                                                ----------        ----------      ----------
                     Charge in lieu of income taxes                  -                 -            148,000
                                                                ----------        ----------      -----------
                                                                $ (15,000)        $  36,000      $  150,000
                                                                 ==========         ========      ==========
</TABLE>


         A  reconciliation  of the  federal  statutory  rate  to  the  Company's
         effective  tax rate  for the  three  years  ended  June 30,  1997 is as
         follows:
<TABLE>
<CAPTION>
    <S>           <C>                                                          <C>            <C>         <C>


                                                                                 1997         1996       1995
    Income tax (benefit) provision at federal statutory rate                   (34.0)%        34.0%      34.0%

    Increase (decrease) in tax resulting from -
       Utilization of operating loss carryforwards                                  -            -       (3.1)
       Temporary items with no tax benefit                                        6.1          7.3          -
       Tax credits utilized                                                         -         (4.1)      (6.4)
       Change in valuation allowance                                             22.9        (35.5)      (7.1)
       Effect of state taxes                                                     (4.6)           -          -
       Prior year tax adjustments                                                 5.2          5.0          -
       Other                                                                      1.1          1.5        3.1
                                                                                  ---          ---        ---
                                                                               (3.3)%         8.2%      20.5%
                                                                               ======         ====      =====
                    Effective tax rate

</TABLE>


                                      -27-

<PAGE>


               PRECISION OPTICS CORPORATION, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997

                                   (Continued)



         The  components of the net deferred tax asset at June 30, 1997 and 1996
         are approximately as follows:
<TABLE>
<CAPTION>
<S> <C>                                                  <C>               <C>

                                                               1997              1996

    Reserves and accruals not yet deducted for tax         $  311,000       $   175,000
    purposes                                                                 
    Other temporary differences                                24,000            17,000
                                                              -------           -------
                                                                                                                
                                                              335,000           192,000

    Valuation allowance                                      (178,000)          (73,000)
                                                             ---------          --------
                                                                                                              
     Net deferred tax asset                                 $  157,000      $   119,000                            
                                                             ===========       =========
</TABLE>

         The  Company  has  provided  a  valuation  allowance  to reduce the net
         deferred tax asset to an amount the Company believes it is "more likely
         than not" to be realized.  The net deferred  tax asset  represents  the
         amount  that  can be  carried  back to  offset  the  prior  years'  tax
         liabilities, if necessary.

    (7)  Profit Sharing Plan

         The Company has a defined contribution  profit-sharing plan that covers
         all  eligible  employees.  The  Company  has  accrued  and  expensed an
         employer  contribution  to this  plan of  $50,000  in  fiscal  1996 and
         $50,000 in fiscal 1995. No employer  contributions  were made in fiscal
         1997.




                                      -28-

<PAGE>




    ITEM 8.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE:  None.

                                    PART III

    ITEM          9.  DIRECTORS,   EXECUTIVE  OFFICERS,   AND  CONTROL  PERSONS;
                  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: The Company
                  will  furnish to the  Securities  and  Exchange  Commission  a
                  definitive  Proxy Statement (the "Proxy  Statement") not later
                  than 120 days  after the close of its  fiscal  year ended June
                  30,   1997.   The   information   required  by  this  item  is
                  incorporated herein by reference to the Proxy Statement.

    ITEM 10.      EXECUTIVE COMPENSATION:  The information required by this
                  item is incorporated herein by reference to the Proxy 
                  Statement.

    ITEM 11.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT:  The information required by this item is
                  incorporated herein by reference to the Proxy Statement.

    ITEM 12.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:  The 
                  information required by this item is incorporated herein by
                  reference to the Proxy Statement.

    ITEM 13.      EXHIBITS AND REPORTS ON FORM 8-K:
<TABLE>
<CAPTION>
                  <S>     <C>

                  (a)      Exhibits.
                           The   exhibits   listed   below  are  filed  with  or
                  incorporated by reference in this report.

                  3.1      Articles of Organization of the Company<F1>
                  3.2      By-laws of Precision Optics Corporation, Inc.<F2>
                  4.1      Specimen common stock certificate<F1>
                  4.2      Private Placement Selling Agent Common Stock Warrant No. 4 dated April 28, 1992
                           issued to James L. Davis and Schedule 1 of Omitted Documents<F3>
                  4.3      Initial Public Offering Common Stock Purchase Warrant No. 3 dated July 10, 1992
                           issued to John C. Michalak and Schedule 2 of Omitted Documents<F3>
                  4.4      Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated
                           January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted Documents<F3>
                  4.5      Promissory Note dated December 5, 1991 between the Company and The First
                           National Bank of Boston<F4>
                  4.6      Agreement Restricting Sale of Stock dated January 15, 1992 by and among Richard
                           E. Forkey, the Company, Kennedy, Mathews, Landis, Healy & Pecora Incorporated,
                           and Equity Securities Trading Co., Inc.<F3>
                  10.1     Lease  dated June 29,  1984  between  the Company and
                           Equity,  First  Amendment to  Commercial  Lease dated
                           June 25, 1990,  and letter  agreement  dated June 25,
                           1990 renewing such lease<F1>
                  10.2     Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date (the
                           "Plan")<F5>
                  10.3     Three separate life insurance policies on the life of Richard E. Forkey<F1>
                  10.4     Master Lease Finance Agreement dated November 3, 1993 between the Company
                           and BancBoston Leasing<F5>
                  10.5     Second Amendment to Commercial Lease between the Company and Equity dated
                           December 9, 1994<F6>


                                      -29-

<PAGE>



                  10.6     Lease dated November 1, 1995 between the Company and Janice M. Bouchard,
                           Trustee of Authority Drive Realty Trust<F6>
                  21       Subsidiaries of Precision Optics Corporation, Inc.<F6>
                  27       Financial Data Schedule.
   
                  99       Important Factors Regarding Forward-Looking Statements<F7>
</TABLE>
[FN]

    <F1>  Incorporated herein by reference to the Company's Registration
          Statement on Form S-18 (No. 33-36710-B).
    <F2>  Incorporated herein by reference to the Company's 1991 Annual Report
          on Form 10-KSB.
    <F3>  Incorporated herein by reference to the Company's 1992 Annual Report
          on Form 10-KSB.
    <F4>  Incorporated herein by reference to the Company's Registration
          Statement on Form S-1 (No. 33-43929).
    <F5>  Incorporated herein by reference to the Company's 1994 Annual Report
          on Form 10-KSB.
    <F6>  Incorporated herein by reference to the Company's 1996 Annual Report
          on Form 10-KSB.
    <F7>  Incorporated herein by reference to the Company's Quarterly Report
          on Form 10-QSB for the quarter ended March 31, 1996.
</FN>


    (b)    Reports on Form 8-K.

           None.


                                      -30-

<PAGE>




                                   SIGNATURES

    In accordance  with Section 13 or 15(d) of the Exchange Act, the  registrant
    caused this report to be signed on its behalf by the undersigned,  thereunto
    duly authorized.

    Date:  September 16, 1997                 PRECISION OPTICS CORPORATION, INC.



                                              By:/s/ Richard E. Forkey
                                                Richard E. Forkey
                                                Chairman of the Board and
                                                Chief Executive Officer

    In  accordance  with the Exchange  Act, this report has been signed below by
    the following  persons on behalf of the registrant and in the capacities and
    on the dates indicated.



    By:/s/ Richard E. Forkey                        By:/s/ Jack P. Dreimiller
       Richard E. Forkey                               Jack P. Dreimiller
       President, Treasurer, and                       Senior Vice
       Director (Principal                             President, Finance
       Executive Officer)                              and Chief Financial
                                                       Officer(Principal
                                                       Financial and
                                                       Accounting Officer)

    September 16, 1997                               September 16, 1997
    ------------------------------                   ------------------
    Date                                              Date


    By:/s/ Joel R. Pitlor                             By:/s/ Edward A. Benjamin
       Joel R. Pitlor                                    Edward A. Benjamin
       Director                                          Director


    September 16, 1997                                September 16, 1997
    -----------------------------                     ------------------
    Date                                              Date


    By:/s/ Robert R. Shannon
       Robert R. Shannon
       Director

    September 16, 1997
    Date


                                      -31-

<PAGE>

<TABLE>
<CAPTION>
                 <S>     <C> 


                                                 INDEX TO EXHIBITS

                  3.1      Articles of Organization of the Company<F1>
                  3.2      By-laws of Precision Optics Corporation, Inc.<F2>
                  4.1      Specimen common stock certificate<F1>
                  4.2      Private Placement Selling Agent Common Stock Warrant No. 4 dated April 28,
                           1992 issued to James L. Davis and Schedule 1 of Omitted Documents<F3>
                  4.3      Initial Public Offering Common Stock Purchase Warrant No. 3 dated July 10,
                           1992 issued to John C. Michalak and Schedule 2 of Omitted Documents<F3>
                  4.4      Warrant No. U-1 to Purchase Shares of Common Stock of the Company dated
                           January 24, 1992 issued to Nathan Newman and Schedule 3 of Omitted
                           Documents<F3>
                  4.5      Promissory Note dated December 5, 1991 between the Company and The First
                           National Bank of Boston<F4>
                  4.6      Agreement Restricting Sale of Stock dated January 15, 1992 by and among
                           Richard E. Forkey, the Company, Kennedy, Mathews, Landis, Healy & Pecora
                           Incorporated, and Equity Securities Trading Co., Inc.<F3>
                  10.1     Lease  dated June 29,  1984  between  the Company and
                           Equity,  First  Amendment to  Commercial  Lease dated
                           June 25, 1990,  and letter  agreement  dated June 25,
                           1990 renewing such lease<F1>
                  10.2     Precision Optics Corporation, Inc. 1989 Stock Option Plan amended to date (the
                           "Plan")<F5>
                  10.3     Three separate life insurance policies on the life of Richard E. Forkey<F1>
                  10.4     Master Lease Finance Agreement dated November 3, 1993 between the
                           Company and BancBoston Leasing<F5>
                  10.5     Second Amendment to Commercial Lease between the Company and Equity
                           dated December 9, 1994<F6>
                  10.6     Lease dated November 1, 1995 between the Company and Janice M. Bouchard,
                           Trustee of Authority Drive Realty Trust<F6>
                  21       Subsidiaries of Precision Optics Corporation, Inc.<F6>
                  27       Financial Data Schedule.
                  99       Important Factors Regarding Forward-Looking Statements<F7>
<FN>

    <F1>  Incorporated herein by reference to the Company's Registration Statement on Form S-18
          (No. 33-36710-B).
    <F2>  Incorporated herein by reference to the Company's 1991 Annual Report on Form 10-KSB.
    <F3>  Incorporated herein by reference to the Company's 1992 Annual Report on Form 10-KSB.
    <F4>  Incorporated herein by reference to the Company's Registration Statement on Form S-1
          (No. 33-43929).
    <F5>  Incorporated herein by reference to the Company's 1994 Annual Report on Form 10-KSB.
    <F6>  Incorporated herein by reference to the Company's 1996 Annual Report on Form 10-KSB.
    <F7>7 Incorporated herein by reference to the Company's Quarterly Report on Form 10-QSB for the
          quarter ended March 31, 1996.
</FN>

</TABLE>


                                                       -32-

<PAGE>